Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-29

1973-1 C.B. 198

Sec. 402

IRS Headnote

An employee receiving a lump-sum distribution of his profit-sharing account from a corporation that purchased part of his former employer's business need not include in income the unrealized appreciation on stock credited to his account by the former employer.

Full Text

Rev. Rul. 73-29

Advice has been requested whether, under the circumstances described below, certain shares of stock are "securities of the employer corporation" for the purposes of section 402(a)(2) of the Internal Revenue Code of 1954.

A corporation established a qualified profit-sharing plan for its employees. The employer's contributions to the exempt trust forming part of the plan were invested in shares of stock of the employer corporation and credited to the accounts of the employee-participants. The employer sold part of its business to an unrelated corporation. Under the sales agreement the employees who worked in the part of the business that was sold ceased to be employees of the seller corporation and became the employees of the buyer. The assets in their accounts under the seller's exempt trust (including stock in the seller corporation) were transferred to the employees' accounts under an exempt profit-sharing trust of the buyer. Subsequently, one of the employees separated from the service of the buyer and received his total distributions payable from the trust forming part of the buyer's plan. The distribution included shares of stock of the seller corporation that has been transferred.

Section 402(a)(2) of the Code provides that where a total distribution by an exempt employees' profit-sharing trust includes securities of the employer corporation there shall be excluded from the amount includible in gross income the net unrealized appreciation attributable to that part of the total distribution which consists of the securities of the employer corporation so distributed.

Section 1.402(a)-1(b)(1)(ii) of the Income Tax Regulations provides that, for the purposes of section 402(a) of the Code, the term "securities" means only shares of stock and bonds or debentures issued by a corporation with interest coupons or in registered form, and the term "securities of the employer corporation" includes securities of a parent or subsidiary corporation of the employer corporation.

The shares of stock in the seller corporation were held or acquired by the seller's exempt trust while the participant was an employee of the seller. Thus, these shares were securities of the employer corporation, within the meaning of section 402(a)(2) of the Code, at that time and their subsequent transfer to the trust of the buyer corporation did not change their status.

Accordingly, it is held that, under the circumstances in this case, the shares of stock of the seller corporation distributed to the employee as part of the total distribution payable from the trust are securities of the employer corporation for the purposes of section 402(a)(2) of the Code.